Price and Trading Volume Reaction Surrounding Earnings Announcements: A Closer Examination
Journal of Accounting Research
Vol. 19 No. 2 Autumn 1981
Printed in U.S.A.
Price and Trading Volume Reaction
Surrounding Earnings
Announcements: A Closer
Examination
DALE MORSE*
I. Introduction
The process of information dissemination and interpretation in securities markets is very complex and mostly unobservable. While changes in prices and the amount of trading that takes place at the market level provide evidence of information processing, Verrecchia [1981] demonstrated that these are not sufficient to describe completely the dissemination of information and its interpretation hy investors. A descriptive study of price changes and trading volume, however, may still provide some insights into how investors react to information. This paper is an empirical investigation of price changes and trading volume during the days surrounding the announcement of quarterly and annual earnings in
the Wall Street Journal {WSJ).
In the original paper investigating trading volume and price changes surrounding earnings announcements. Beaver [1968] was primarily concerned with whether the annual earnings announcement had "information content" (i.e., led to changes in investors ' assessments of the prohability distrihution of future returns). If there were any significant price changes and/or trading volume during the week of the announcement, then the annual earnings announcement was assumed to have had
* A.ssistant Profes.sor, Cornell University. I would like to thank William Beaver, James
Patell, and David Ng for special help on my dissertation from which this paper is derived.
Also, I have modified this paper ba.sed on helpful comments from the Cornell Accounting
Workshop and anonymous referees. Financial support from the Arthur Andersen Foundation was greatly appreciated. [Accepted for publication October 1980.)
374
Copyright ®, Institute of Professional Accounting 198]
REACTION SURROUNDING EARNINGS ANNOUNCEMENT
375
"information
Vol. 19 No. 2 Autumn 1981
Printed in U.S.A.
Price and Trading Volume Reaction
Surrounding Earnings
Announcements: A Closer
Examination
DALE MORSE*
I. Introduction
The process of information dissemination and interpretation in securities markets is very complex and mostly unobservable. While changes in prices and the amount of trading that takes place at the market level provide evidence of information processing, Verrecchia [1981] demonstrated that these are not sufficient to describe completely the dissemination of information and its interpretation hy investors. A descriptive study of price changes and trading volume, however, may still provide some insights into how investors react to information. This paper is an empirical investigation of price changes and trading volume during the days surrounding the announcement of quarterly and annual earnings in
the Wall Street Journal {WSJ).
In the original paper investigating trading volume and price changes surrounding earnings announcements. Beaver [1968] was primarily concerned with whether the annual earnings announcement had "information content" (i.e., led to changes in investors ' assessments of the prohability distrihution of future returns). If there were any significant price changes and/or trading volume during the week of the announcement, then the annual earnings announcement was assumed to have had
* A.ssistant Profes.sor, Cornell University. I would like to thank William Beaver, James
Patell, and David Ng for special help on my dissertation from which this paper is derived.
Also, I have modified this paper ba.sed on helpful comments from the Cornell Accounting
Workshop and anonymous referees. Financial support from the Arthur Andersen Foundation was greatly appreciated. [Accepted for publication October 1980.)
374
Copyright ®, Institute of Professional Accounting 198]
REACTION SURROUNDING EARNINGS ANNOUNCEMENT
375
"information
References: BEAVER, W. "Tbe Information Content of Annual Earnings Announcements," Empirical Research in Accounting: Selected Studies, 1968 GARMAN, M. "Market Microstructure " Journal of Financial Economics (June 1976). GRANT, E. "Market Implications of Differential Amounts of Interim Information." Journal of Accounting Research (Spring 1980): 255-68. KIGER, J. "An Empirical Investigation of NYSE Volume and Price Reactions to tbe Announcements of Quarterly Earnings." Journal of Accounting Research (Spring 1972): "Asymmetrical Information in Securities Markets and Trading Volume." Journal of Financial and Quantitative Analysis (December 1980). SCHOLES, M., AND J. WILLIAMS. "Estimating Betas from Non-Syncbronous Data." Journal of Financial Economics (December 1977): 309-28. Accounting Research (Spring 1981): 271-83.